Saturday, May 7, 2011

Oil prices may have you thinking of alternative energy stocks

Saturday, May 7, 2011

Given the rise in oil prices, youd think that stocks of alternative-energy companies would be soaring. And youd be right.

  • Seth Lucas and Sam Schwarz, left, install solar panels on the roof of the South Coast Food Share pantry in Myrtle Point, Ore.

    By Benjamin Brayfield, AP

    Seth Lucas and Sam Schwarz, left, install solar panels on the roof of the South Coast Food Share pantry in Myrtle Point, Ore.

By Benjamin Brayfield, AP

Seth Lucas and Sam Schwarz, left, install solar panels on the roof of the South Coast Food Share pantry in Myrtle Point, Ore.

Alternative-energy stocks often pop during sudden oil price spikes like, say, the one weve experienced recently. But its not a particularly rational move. Its more driven by sentiment than fundamentals, says Edward Guinness, manager of the Guinness Atkinson Alternative Energy fund (GAAEX).

Normally, alternative-energy stocks have very little correlation with the price of oil, for the simple reason that there really isnt an alternative to oil for transportation. Most U.S. electricity is powered by natural gas or coal, both of which are in ample supply.

Nevertheless, there are a few interesting alternative-energy stocks around, and a few useful funds for those who think correctly, probably that sooner or later, well have to increase our use of wind and solar power.

Its no wonder that investors are thinking about alternative energy. Light, sweet crude the kind of low-sulfur oil that refiners love has soared to $112.29 a barrel from its 12-month low of $65.96 set in May. Drivers are returning to the world of the $60 fill-up.

Despite the introduction of some all-electric cars, most transportation here and abroad depends on burning some form of oil, whether its jet fuel, gasoline or diesel.

In the meantime, the price of coal, which generates 57% of U.S. electricity, has fallen to about $80 per short ton, down from $150 a short ton in July 2008. (Thats for Appalachian coal; coal from other areas is cheaper.) The price of natural gas, the second-most-used fuel for powering electric plants, has plunged to $4.33 per thousand cubic feet from $13.31 the same period.

VIDEO: Installing solar panels: Get the most out of your solar panel investment.

This year, the iShares S&P Global Clean Energy exchange traded fund (ICLN) has gained 19%, vs. about 6.3% for the Standard & Poors 500-stock index. This is unusual, says David Kurzman, manager of the Leuthold Global Clean Technology fund (LGCTX). Basically, theres no correlation between alternative energy stocks and oil prices, unless oil prices spike quickly. Its largely a psychological effect people think theres some connection between the two and rush in.

Just because the rise in alternative-energy stocks was unwarranted doesnt mean that they have no potential, however. But new energy technologies suffer from the same difficulties as new electronic technologies: They have lots of engineering hurdles to overcome.

Consider solar panels, one of the fastest-growing sectors of alternative energy. Although silicon is a plentiful element, solar panels require exceptionally pure silicon which, ironically, takes a great deal of energy to manufacture. Its a pretty extraordinary process, Guinness says.

Kevin Landis, manager of Firsthand Alternative Energy fund (ALTEX), likes companies that increase efficiency in making solar panels. One example: Amtech Systems (ASYS), whose equipment cuts silicon wafers with less waste.

In the world of wind power, a favorite of several managers is Vestas, the leader in wind-turbine manufacturing. The Danish company isnt traded in the U.S., however. And Landis thinks that wind power has, well, headwinds: Most wind projects are big, which means they are often located in remote areas, which requires extra expense for transmission lines and maintenance. And, because they are big projects, they have to sell their electricity at wholesale which makes it hard to compete against low-cost gas and coal plants.

David Katzman thinks it might be better to look at companies that make coal plants cleaner, such as ADA-ES (ADES).

If youd rather invest via mutual funds, consider Leuthold Global Clean Technology, up 8.7% this year, or Guinness Atkinson Alternative Energy, up 12.4%. Index and ETF fans might consider the iShares S&P Global Clean Energy Index fund.

We can all hope that sooner or later, fear of oil price spikes will be a thing of the past. Unfortunately, it may be much later than anyone likes. Nevertheless, if you have a view to the long run, you might consider adding a little sun and wind to fuel your portfolio.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays; for more of his columns go to His book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. John's e-mail is Twitter:

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